Determining what to do on mortgage (rate lock)

3 Replies

Curious how everyone approaches the aspect of buying points, bigger down, or standard rate etc. 

Looking at a mortgage around 5% int, could get it down to 4% ish with $4k in points. 

My other choice is to leave it at the higher rate and do nothing, or perhaps take the money I would spend on points and make a large upfront principal payment. 

Any thoughts on how one would evaluate that? 

Investment properties have a unique added element, and that is opportunity cost. Let's suppose that $4k in points improves the property cashflow $50/mo by reducing the payment by that much. Let's further suppose that $4k could be used to upgrade the kitchen, which would let it command $75/mo in additional rent. In this case, it's not immediately obvious that rate is the end all be all.

Typically the more beat up the property, the better it will be to invest in the property itself rather than the financing of said property. 

I analyze the break-even period.  If it takes longer than 3 years to save $4k in interest (in your example), I don't buy down the rate. 3 yrs on a long-term hold would mean years of gravy beginning year 4.

If I remember right , 1 pt usually reduces the rate about .25%. Sounds right if you are getting a $100k loan.

Chris makes an excellent point if your dollars are very finite.  Your $4k may be better spent on the property if that's your whole budget.

@James Edwards in general, investors seek to keep as much cash in their pocket as possible.  Your interest is tax deductible, yes you would cash flow more with a lower interest rate, but what if you could find another property and having that extra $4000 would help you acquire another deal?  Cash is critical and unfortunately is limited for everyone...even if you have $1,000,000...your limit might be higher but you still have a limit.